Proposed U.S. tax cut would narrow Canada's investment advantage

House Ways and Means Committee Chairman Rep. Dave Camp, R-Mich., the House tax writer, speaks with reporters on Capitol Hill in Washington, Wednesday, Feb. 26, 2014, to outline a major plan to rewrite the nation’s tax code.

The top Republican tax writer in Congress has proposed cutting the U.S. federal tax on business profits to 25 per cent, a pitch that would narrow Canada's advantage over its biggest competitor for international investment.

Dave Camp, chairman of the House Ways and Means Committee, also would simplify the tax code by replacing the current seven personal tax brackets with two. American taxpayers who currently pay between 25 and 39.6 per cent on their income would pay 25 per cent, and those who currently pay between 10 and 15 per cent would pay 10 per cent under Mr. Camp's plan.

The corporate- and personal-income tax cuts headline a 979-page bill that stands as the most ambitious attempt to overhaul U.S. tax law in three decades. Odds are slim that the bill will move forward quickly, but Mr. Camp's proposals could shape a debate that both Democratic and Republican leaders say they want to have.

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"There are a couple of reasons to be optimistic about it," Josh Earnest, a White House spokesman, told Bloomberg News. At the same time, "there are some aspects of this proposal that we do not agree with," Mr. Earnest said.

When measured against the size of its economy, the United States collects relatively little tax revenue. The tax code is loaded with a myriad of tax breaks and loopholes that economists say hurt productivity because companies devote energy to lowering their tax bills that could be put to more productive uses. Yet the U.S. corporate rate – at 39.6 per cent – is the highest among developed countries, discouraging international companies from claiming profits in a country that often is the source of the bulk of their revenue.

"If we don't act, we will continue to fall behind," Mr. Camp said at a press conference in Washington, singling out Canada as a country that has lowered corporate taxes to become a more competitive place to do business.

Canada's federal corporate tax rate is 15 per cent, while provincial and territorial rates range from 10 per cent in Alberta to 16 per cent in Nova Scotia. U.S. states tax corporate profits at rates that range between 3 per cent and about 9 per cent.

Predictably, lobbyists swarmed to attack various aspects of Mr. Camp's plan that would hurt the industries they represent.

Banking associations, especially, were incensed over a provision that would add a levy on the assets of the country's biggest banks. The American Petroleum Institute took issue with Mr. Camp's intention to end an accounting method favoured by oil producers. Charles Schumer, a leading Democratic senator, called Mr. Camp's plan "dead on arrival" because it would end taxpayers' ability to deduct state and local taxes from their federal tax returns.

Mr. Camp also had his supporters, as lowering the corporate tax rate is broadly popular with U.S. business. The politics are working against him in the short term because Republican and Democratic leaders are reluctant to attach themselves to something as potentially controversial as tax reform ahead of midterm elections.

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The political backdrop will change after the midterms, and many in Washington say tax overhaul is possible in 2015. Barack Obama has advocated lowering the corporate tax rate for much of his presidency. He differs with Mr. Camp on the need to lower individual rates, and the president also wants the richest Americans to pay higher taxes. Mr. Camp's plan is revenue-neutral.

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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